The US bond market has been experiencing massive volatility recently as investors piled into safe-haven assets, such as US bonds. As a result, in the previous three days, the 2-year US yield has decreased by about 100 basis points (1%), marking the largest three-day decline since “Black Monday” in 1987.
Today, the 2-year yield stopped at the critical 200-day moving average, trying to recover as investors reacted to the latest US inflation data and some “good news” coming from the banking crisis in the US.
Inflation meets expectations
Inflation in the United States, as measured by the Consumer Price Index (CPI), decreased to 6% annually in February from 6.4% in January, according to the US Bureau of Labor Statistics. This result was consistent with analyst estimates. In addition, the CPI increased 0.4% on a monthly basis, confirming analysts’ projections.
US inflation yearly rate, source: tradingeconomics.com
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The Core CPI, which excludes volatile food and energy costs, increased by 0.5% monthly, exceeding market expectations of 0.4% and reducing the annual rate from 5.6% to 5.5%.
The cost of housing increased by 0.8%, accounting for almost 70% of the overall price increase. Moreover, food continues to be a source of concern for consumers and the central bank. The price of meals prepared at home increased by a relatively modest 0.3% but was up 10.2% from the previous year, while the cost of eating out increased by 0.6% and was up 8.2%.
According to Bloomberg, swap contracts referencing Fed policy meetings reduced the probability of a hike at the next week’s meeting to less than one-in-two. Meanwhile, contracts for the remainder of 2023 indicate that the Fed might drop rates by nearly an entire percentage point from their May peak before the end of the year.
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With the collapse of SVB, economists from Goldman Sachs and asset managers from PIMCO suggested that the Fed may take a break from the policy rate. The analysts at Nomura went a step further, speculating that the Fed might reduce its target rate next week.
“A policy mistake is hands down the biggest risk in the market,” Mary Manning, global portfolio manager for Alphinity Investment Management, said on Bloomberg Television. “Controlling inflation but addressing the fact there is some instability in the banking system is difficult.”
Situation improves notably
Earlier today, sentiment improved after a Bloomberg report that Apollo and Blackstone, two of the world’s largest alternative asset managers, are among the investors seeking to acquire Silicon Valley Bank shares.
As a result, First Republic Bank skyrocketed 44% in premarket trade, PacWest Bancorp rose 34%, and Western Alliance Bancorp gained more than 20%, erasing most of yesterday’s losses.
2-year US yield daily chart, source: author´s analysis, tradingview.com